Although lowering your monthly mortgage payment is always attractive, don’t let a slightly lower mortgage rate fool you. If you’re not careful when thinking about a mortgage refinance, you could cost yourself more in expenses than what you save in monthly payments — and not even know it. (Even with so-called “no cost” mortgage loans.) Refinancing a home loan has more to it than appears on the surface. Be sure to consult with a mortgage professional before getting yourself into something you can’t reverse.
Mistake #1: Waiting for lower interest rates.
Mortgage rates are notoriously unpredictable. No one can speculate on mortgage rates with enough accuracy to win every time. If rates are attractive, consider refinancing. If you do it right, and rates go down again later, you can always refinance again. If rates go down substantially before you finalize the loan, you can always request a rate drop. Typically, your mortgage broker will do this for you anyway. If rates go up, you’ll be glad you locked that initial rate in!
Mistake #2: Not being fully aware or mortgage market conditions
Mortgage shopping sites are great, but be careful! They can give you an idea of current mortgage rates and let you know best rates they have to offer for a specific term, but they may not always apply to your specific needs and situation. It sounds good on the surface because you get mortgage lenders from across the country competing for your business, but be careful. Your mortgage broker will become familiar with your specific needs and situation and ensure the best deal possible is captured. Not knowing what products are right for you might not only cost you the lowest possible rate, but depending on your other circumstances, it could actually cause you to miss that window of opportunity.
Mistake #3: Not looking at the whole picture.
If you have been paying your mortgage for several years, the amount saved every month by refinancing might not save as much as you think. In fact, it usually costs far more than people think! In other words, if you are 10 years into your mortgage loan, refinancing your mortgage could make you start over on the repayment of that debt. Obviously, it might be great to save some money after refinancing your home loan, but once you refinance the loan you’ve been paying on for 10 years, you’ll be paying off that loan for an additional 10 years! That could really hurt. Sure, it may seem great that you’re lowering your monthly payment by a few hundred dollars or more, but when you factor in the extra payments that you’ll have after refinancing, you’ll find that your monthly savings can actually cost you thousands of dollars over the life of the loan! Structuring your loan properly is as important, if not more important than your interest rate.
Be sure to get a good understanding of your rate, terms, conditions and closing costs before jumping into a new loan that could cost thousands of dollars over the life of your new loan. Get your mortgage broker to explain not only what your monthly payment will be, but also what your new loan balance will be compared to your old loan, what the new interest rate is, and how many years you will be adding to your repayment schedule if you do refinance.
VERICO The Financial Forum Ltd.
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